Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that AS Tallink Grupp (TAL:TAL1T) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for AS Tallink Grupp
How Much Debt Does AS Tallink Grupp Carry?
As you can see below, at the end of September 2020, AS Tallink Grupp had €553.4m of debt, up from €459.7m a year ago. Click the image for more detail. However, it does have €30.7m in cash offsetting this, leading to net debt of about €522.7m.
A Look At AS Tallink Grupp's Liabilities
We can see from the most recent balance sheet that AS Tallink Grupp had liabilities of €275.8m falling due within a year, and liabilities of €525.6m due beyond that. On the other hand, it had cash of €30.7m and €25.7m worth of receivables due within a year. So it has liabilities totalling €745.1m more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's €502.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if AS Tallink Grupp can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year AS Tallink Grupp had a loss before interest and tax, and actually shrunk its revenue by 38%, to €590m. To be frank that doesn't bode well.
Caveat Emptor
Not only did AS Tallink Grupp's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €60m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €39m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with AS Tallink Grupp , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About TLSE:TAL1T
AS Tallink Grupp
Provides marine passenger and cargo transportation services in the Baltic Sea.
Average dividend payer low.
